Month: December 2017

Remove long-term capital gains tax exemption: BSE

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One of the most important stock market participants is making a case for reinstating of long-term capital gains (LTCG) tax on equity investments.

According to sources, the BSE has made a presentation to the Union finance ministry that LTCG exemptions cause huge revenue loss to the government and also lead to market manipulation. LTCG is tax-exempt on the sale of listed securities, since 2005. This had made India one of the most liberal markets in this regard, the BSE said in a presentation last Friday.

LTCG are profits on sale of shares on a stock exchange platform after a holding period of at least a year. Short-term capital gains (STCG) are profits on sale of shares held for less than 12 months; these are taxed at a flat 15 per cent.

“Since India has one of the lowest tax collection to GDP (gross domestic product) ratio within G-20 countries, every effort must be taken to shore up the revenue collection. LTCG taxation could help,” it had reportedly said. The exchange pegs the loss to the exchequer at Rs 49,000 crore annually for not charging LTCG.

“LTCG exemption is a great concept. It is aimed at encouraging long-term equity investments, necessary for the economy. There have, regrettably, been some instances of its misuse. Instead of a blanket abolition, it would be better to fine-tune the tax provisions to encourage its bona fide use,” said Prithvi Haldea, founder, Prime Database.

“A lot of investors have made good returns from the market in the past year. However, the tax outgo from these investors is barely anything, thanks to the exemption under LTCG. There is definitely a case to look into this,” said a senior legal expert, asking not to be named.

Market players said re-introduction of LTCG, however, could trigger a sell-off in the stock markets. In the run-up to last year’s Union Budget, investors were worried at adverse tax changes for capital market investors. The government, however, had not tinkered with that structure.

“Talk of LTCG tax has been doing the rounds in the past few years. It remains to be seen whether the government will muster the courage to do it, as this will be a huge market disruptor. After demonetisation and the GST (goods and services tax) roll-out, the government would like to play safe till the 2019 election,” said the official cited earlier.

Unscrupulous entities have also been using this tax benefit to launder money by dealing in shell company shares. In early August, the markets regulator had suspended trading in 331 suspected shell companies identified by the ministry of corporate affairs. BSE says the LTCG leeway opens the door for tax arbitrage and manipulation.

Among the other suggestions from the bourse are curbs on derivatives trading to ensure it is largely used for the purpose of hedging. The exchange has also raised concerns over manipulation of stock prices through algorithm trading.

long-term capital gains tax exemption

Business Standard

Bogus Penny Stocks Capital Gains | Bombay High Court Judgment

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This Tax Alert by Ernst & Young summarizes the ruling of the Nagpur Bench of Bombay High Court (HC) in the case of Smt. Shantidevi Bimalchand Jain (Taxpayer) v. ITO [ITA No. 18/2017; Order dated 10 April 2017] wherein the HC upheld the denial of the long-term capital gains exemption for the sale of a listed company’s shares through a stock exchange in view of the Taxpayer’s inability to justify the genuineness of the transactions. In the facts of the case, the Taxpayer had purchased shares of two private limited companies, for a petty amount. These companies merged into a listed company after a short while. In the next year, the Taxpayer transferred the listed company’s shares for an exorbitant sum and claimed the resultant income as long-term capital gains eligible for capital gains exemption under section 10(38) (Section) of the Indian Tax Laws (ITL). The Tax Authority and the lower appellate authorities denied the exemption and taxed the gains as business income. The Taxpayer appealed to the HC.

The HC upheld the denial of long-term capital gains exemption and approved treatment of transactions as an “adventure in the nature of trade”, liable to be taxed as business income, considering that the acquisition of shares was with a clear intention to exit after making a super-natural profit. The lack of evidence on the genuineness of transactions and inability of the Taxpayer to explain the sudden spurt in the share price also led to the denial of the exemption.

Background

• Section 10(38) of the ITL, inter alia, provides that any capital gains arising from transfer of listed equity shares held for a period of more than 12 months is not taxable if the sale is subject to securities transaction tax (STT).

• The exemption is not available if transactions in listed equity shares are part of a business carried on by the taxpayers. The definition of “business” under the ITL includes inter alia any trade or “adventure in the nature of trade”.

• Recently, it was observed by the Central Government (CG) that the benefit of above exemption was misused for routing unaccounted money through the medium of long-term capital gains. In order to deal with such a menace, the Finance Act, 2017 amended the Section and made above exemption subject to fulfilment of specified conditions.

Post the amendment, the capital gains exemption is not available if the shares are acquired on or after 1 October 2004 and such acquisition was not chargeable to STT. However, with an intent to protect capital gains exemption for genuine acquisitions, the CG was empowered to notify the transactions which will continue to be exempt under the Section and not be hit by the amendment. The CG vide Notification No. SO 1789 (E) [7] issued final Notification providing the negative list of transactions for which the benefit of capital gains exemption will not be available. Alongside the negative list, the Notification also provided carve-outs to insulate genuine acquisitions, for which exemption will continue to be available [Refer EY Alert titled “Central Government notifies the transactions of listed equity shares not eligible for Long Term capital gains exemption” dated 6 June 2017].

Facts

• In tax year 2003-04, the Taxpayer, a senior citizen, on advice of her tax counsel, purchased equity shares of two penny stock companies namely SMPL and SZDPL for approximately INR 4 to 5 per equity share.

• In tax year 2004-05, both the investee companies merged into a listed company KL pursuant to which the Taxpayer was allotted one equity share in KL for every four shares held in SMPL and SZDPL.

• In tax year 2005-06, the Taxpayer, through another stock broker, sold all equity shares of KL at an exorbitant rate of approximately INR 486 per equity share. The sale transaction was subjected to STT and sale proceeds were directly remitted by the stock broker to the Taxpayer’s bank account.

• In tax return of tax year 2005-06, the Taxpayer claimed exemption from long-term capital gains arising on transfer of investment in listed equity shares of KL.

Having regard to the Taxpayer’s inability to adduce evidence to justify the sale at an exorbitant price, the Tax Authority and lower appellate authorities considered the dealings in question as an “adventure in the nature of trade” and taxed the gains as business income. Consequently, the benefit of long-term capital gains exemption was denied to the Taxpayer. Alternatively, the second Appellate Authority, the Income Tax Appellate Tribunal, observed that the receipt of sale of equity shares could also be taxed as unexplained credit.

• Aggrieved, the Taxpayer appealed further to the Bombay HC.

HC’s decision

• Having regard to the following facts as gathered from the order of lower appellate authorities, the HC dismissed the Taxpayer’s appeal and upheld the denial of long-term capital gains exemption. The HC also upheld the characterization of purchase and sale transactions as “adventure in the nature of trade” and their consequent taxation as business income.

• The Taxpayer, a senior citizen, had acquired shares of SMPL and SZDPL solely on the suggestion made by her son’s friend and was herself not aware of any other details of the investee companies. The acquisition was made in anticipation of super-natural profits. There was no motive to earn regular income by way of dividend on investment but investment was made with a motive to earn profit.

• The payments for the above acquisition were made in cash. Both the investee companies viz. SMPL and SZDPL were located at the same address. Authorized signatory of both the investee companies was also the same. Further, their address coincided with the address of the stock broker (through whom the Taxpayer acquired the shares).

• KL, the listed company in which both the investee companies had merged was suffering huge losses. Despite a weak financial position, the shares of KL were quoted at a high price on the stock exchange.

• The stock broker through whom the Taxpayer had sold shares of KL did not respond to the notice issued by the Tax Authority requesting the name, address, and bank account of the person who had purchased shares of KL from the Taxpayer

• The purchase of shares of SMPL and SZDPL for a petty amount shortly followed by their merger into KL and sale of shares of KL at an exorbitant price without any reasons to support the sudden spurt in share price and without cogent evidence to prove the genuineness of sale transaction lead the Tax Authority to believe that the transactions were actually an attempt to legitimize unaccounted money through the medium of long-term capital gains exemption. The mere routing of the money through a bank account was not regarded sufficient to prove the genuineness of the transactions.

Ernst & Young Tax Alert

Clarification about applicability of GST on Under Construction and Ready-To-Move-In Property

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Clarification about applicability of GST on Under Construction and Ready-To-Move-In Property

As per GST law, construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration has been received after issuance of completion certificate, where required, by the competent authority or after Rs first occupation, whichever is earlier, is a supply of service and liable to GST.

1. Sale of building is an activity or consideration which is neither a supply of goods nor a supply of services (Para 5 of schedule III of the CGST Act, 2017).

2. It flows frorn the above facts that, sale of ready-to-move-in or completed property does not attract GST. GST is payable only on under construction property as discussed below.

Property for which completion certificate has been issued

No GST is applicable on ready-to-move-in or completed property as per Para 5(b) of Schedule II of CGST Act, 2017.

Under Construction Property

Entire consideration has been paid to the builder before 1st July, 2017

There is no GST payable on such property even if the construction is completed after 1st July, 2017. This transaction will attract Service Tax at the rate of 4.5% because as for the Point of Taxation Rules, 2011 applicable to Service Tax, where the invoice was raised or payment made prior to the appointed date under GST, the point of taxation arose before the appointed day and thus such transaction attracts Service Tax and not GST.

Part consideration has been paid to the builder before 1st July, 2017

4.5% of Service Tax is applicable on the invoices raised or consideration paid before the 1- July, 2017. However, payment, made by the buyer to the builder on or after 1. July, 2017 against invoices issued on or after 1- July, 2017 shall attract GST@12%.

RATE OF GST

Effective rate of GST payable on purchase of under construction residence or commercial properties from a builder involving transfer of interest in land or individual share of land to the buyer, is 12% with full Input Tax Credit (ITC). [GST payable @ 18°A on 2/3rd of the amount for the property; 1/3rd of the amount having F.: been deemed as value of land or undivided share of land supplied to the buyer.]

Consideration which doesn’t constitute transfer in land or undivided share of land as part of consideration, such as construction services provided by a sub- contractor to the builder, attracts GST at the standard rate of 18% with full ITC.

Clarification about applicability of GST on Under Construction and Ready-To-Move-In Property

Narendra Modi closing in on tax evaders, will make evasion impossible

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The government’s plan to use data obtained from the Goods and Services Tax (GST) filings to track those who are escaping income tax is one more step towards pinning down the tax evaders. For the past two years, Prime Minister Narendra Modi has been tightening the noose around tax evaders. The government’s various steps are likely to show visible results next year. 2018 may well turn out to be the year of the taxman when tax evasion will become nearly impossible.

The government wants to create a database whereby income of companies and their promoters could be matched with that of the GST returns filed. This is the first time the government would be tallying indirect tax data with income tax filings in such a big way. Unlike the earlier tax regime, GST leaves a trail, especially for the business of size. Collating this data trail with income tax will make it hard to under-report income or exaggerate expenses.

According to experts, data analytics can establish linkages between people, their income and investments and can raise red flags. By using advance tools to scrutinise both structured and unstructured data, the government can analyse and establish relationships between different entities or people going several levels deep, based on different sets of data such as addresses, phone calls, social media interactions, travel trends and I-T returns.

Demonetisation throwing up huge data on bank deposits gave the government an opportunity to apply data analytics to scan tax irregularities. It can even track your online behaviour. Ever wondered how websites show you ads that match your interests? They track your searches and behaviour on Internet. Financial data can also come under a similar but closer scrutiny if data analytics is deployed to detect tax discrepancies. Robo-audits—or computers comparing your tax information with third-party data—can bring almost every single taxpayer under scrutiny. If you post a picture of your shiny new car on social media, be prepared to answer the taxman. With its ‘Project Insight’, the tax department can know more about your expenditure than you think. Project Insight uses data analytics to glean information from social media sites to find mismatches between spending and declared income.

Last year, the tax department signed a pact with L&T Infotech for implementation of Project Insight, which is designed to strengthen the non-intrusive information-driven approach for improving tax compliance.

The government is even bringing so-called “safe methods to evade taxes’ under scrutiny. For example, agricultural income is exempt from tax in India, but many times people use this exemption to convert black money into white. Some land-owners claim tax exemption on the basis of fake payment slips from vendors, thus proving that they had farmed the land before selling it.

But now income tax department has a very effective way to find out such tax evaders. The department accesses satellite imagery from Indian Space Research Organisation (ISRO) of the piece of land for specific time periods and if there are no standing crops in that period, it is proved that the assessee is trying to avoid taxes.

Use of technology to mine and analyse huge caches of data generated by demonetisation, GST filings and internet trails will leave little space for anyone to evade taxes. As government’s data analytics drive started showing results next year, income tax will become an inescapable certainty.

The Economic Times